Supplying the Bullets in the Online Air Travel War Sabre (SABR) The mega-trend of increasing online air travel and hotel reservations isn’t a new story, but it remains a powerful one. Big outfits like Expedia and Priceline recently reacted well to earnings after revealing stronger bookings than expected, and mid-sized Ctrip.com has great growth potential as it moves to dominate the Chinese travel booking market. Which one will be the leader going forward? Will it be Expedia, which has made big moves by purchasing HomeAway and Orbitz in recent months? Or Priceline, with its buys of OpenTable and Kayak? Or Ctrip, which combined with its largest competitor, Qunar, to dominate China? And what about the airlines themselves, many of which are also enjoying boom times? Clearly, competition in this space is going to be fierce in the years ahead, so instead of trying to pick a winner in a crowded field, we’re recommending a stock that’s sure to benefit no matter who wins—the bullet provider to the air and hotel booking wars, so to speak. Sabre (SABR) operates the leading global distribution system (GDS) in the world, which is basically a big reservation network that collects data on available flights, hotels, prices and times/dates, and then organizes and distributes them in a concise manner. Many major airlines and online sites (like Priceline and Expedia) are customers, as well as travel agencies (which are still used by many corporate travelers). Airlines and hotels pay a fee to Sabre to use the system, while Sabre gives travel agents incentives to use its network. The end result is our favorite way to play the boom in overall (and online) travel bookings. Best of all, there’s not much competition here, with just three major players in the field—Sabre has the largest market share at 37%, with most of its bookings in the U.S. But it’s aiming for big things in Asia, too, where the industry’s fastest growth is occurring—last year, Sabre bought Abacus, the leading GDS player in Asia, serving more than 100,000 travel agents and 11 of the top Asian airlines. Beyond its GDS, Sabre has an increasingly profitable IT business (about 30% of revenue) that helps airlines and hospitality players improve their marketing, distribution and operations. The company is bolstering this group via acquisition as well; it completed the purchase of Trust Group in mid-January, boosting its hotel customer base by 30% to nearly 32,000 total, including Wyndham Resorts. With airlines and hotels raking in the money, demand for Sabre’s IT solutions should remain very strong. Put it together and you have a “neutral” technology provider that’s producing excellent results as the industry as a whole expands. Yes, there’s some risk if the economy (and travel bookings) collapse, but the big trend is up, and the company’s recent quarterly report and outlook confirm that management expects business to accelerate. Last year, Sabre’s revenues rose 13% in total, while earnings per share improved 17%. But the exciting part is what comes next—management just guided to 15% revenue growth for 2016, with earnings expected to grow 30% and free cash flow (which, by the way, funds a solid 2.0% dividend) expanding by 60%.
As for the stock, it came public back in April 2014, made no net progress for the next six months, and then pushed steadily higher the following year, doubling from 15 to 30. The market’s slide of the past few months dragged SABR as low as 22, but then the stock’s character changed—shares soared on their heaviest weekly volume ever after earnings two weeks ago, and (importantly), have continued romping higher since then. The trick is where to buy the stock. It’s likely SABR will back off somewhat after surging toward its old highs during the past couple of weeks (there are probably many investors who own the stock in the 28 to 30 area who want to get out even). But we also think shares have clearly bottomed; that sort of buying volume is a sign many big investors (488 mutual funds owned shares as of year-end) were adding shares. If you want to play it carefully, you can buy a half-sized position (dollar-wise) around here, then add the other half should SABR eventually lift above 30.5 to new highs. For our part, though, we’ll keep it simple, adding a full position tomorrow. An initial loss limit in the 23 to 23.5 area should keep risk in check and allow the stock plenty of wiggle room if the stock pulls back. BUY.
Sabre (SABR 27) 3150 Sabre Drive Southlake, TX 76092 www.sabre.com